Tax Planning

Income splitting for pensioners is an excellent means of lowering total family tax. It works when there are two people of different income levels. Pension income that may be split comprises employment pension and RRIF, but not OAS or CPP. A key benefit is that the higher-income spouse whose pension income is split now pays tax at a lower marginal tax rate. Another benefit is that the overall family tax payable is reduced. There are some challenges. The lower-income spouse technically has to pay more tax in the individual sense, so a family plan to pay any outstanding taxes should […]

Transferring assets from a person to a corporation is complex but very important. If the transfer is done correctly, the value of the assets may be extracted tax-free (‘boot’). Or, the value of the assets become ‘Paid Up Capital’ (PUC) attached to shares which may be extracted tax-free from the corporation at a later date. As tax is your relationship with the government, the government is saying ‘you paid tax on your earnings, then invested it. If you invest your earnings, then take the same amount out of your investment, we won’t tax you on it.’ Fair enough. However, there […]

In Canada, there are two tax brackets for incorporated business income. The lower one, Small Business Deduction (SBD) rate is about 15%. The SBD is on the first $500,000 of income (up until a few years ago it was $400,000). Above $500,000 of income, the second ‘tax bracket’, the corporate rate is 26.5%. To illustrate: between $400K and $500K of income, $15,000 is tax payable. Between $500K and $600K of income, $26,500 is tax payable. This is a huge jump of 76.67%! However, due to the system of integration, the taxation activity flows down to the individual level when cash […]

There are a few resources from whom you can learn about tax. If you are a member of a specialized business group, they may have some key resources. There may be incubators (like www.investottawa.ca) that offer free seminars on topics such as HST. Newspapers, especially national ones, have specialists writing particularly about personal tax matters. Blogs and the CRA websites may also help. Books are great resources too. For a good introduction to taxes, I recommend Evelyn Jacks’ books. They provides knowledge in proper amounts so one doesn’t bite off more than they can chew. Still, the 6-cm thick […]

By now, one should have the financial statements for the first two quarters of the year. Time to compare and contrast that with the installments registered with the CRA. If your business is doing better than expected, it may be time to increase your installments to avoid penalties and interest. If you business is easing down a bit (compared to your budgeted estimates), altering your installment registration with the CRA can reduce your taxes payable.

A number of stories are coming out of people who sell an asset (condos for example), then sell and think they pay capital gains. Instead, the CRA challenges that, and states that the sale is business income. The stakes are high. Let’s say there is a profit of $50,000. If the person did not intend to buy and sell the condo for profit (i.e. bought the condo then got married and moved to a house), they should pay capital gains. The $50,000 profit is included in income at a 50% rate, or $25,000, and taxed at the highest marginal rate […]

Tuition increases faster than inflation, and the rates are soaring to the heights of the Ivory Tower. Meanwhile, provincial debt is increasing to the point that Ontario puts more money to interest payments on government debt than it does to postsecondary education. Universities are grappling with underfunded pension plans. Tuition is likely to remain high. There are tax credits that come with inflation, but they are around a max of 17%. Students who earn enough to use the credit gain a 17% tax credit. The rest may be carried forward to future years. The student may transfer $5,000 to a parent […]

In the normal course of business, bartering occurs. It is important to carefully approach this as the tax laws are strict. Basically, one should include the regular normal income as revenue and the cost of the barter as an expense. For example, let’s say John rents a basement apartment for $600 a month to Stuart. John and Stuart agree to cut the rent by $100 a month for snow removal, and lawn maintenance. It is a net of $500 income for John. The CRA wants to see the $600 and $100 figures in the income and expense areas, respectively. For […]

Taxation can be a big problem for small businesspeople. It helps to break it down into smaller more manageable challenges. How does one manage to plan for HST, corporate, and personal income tax? HST is straightforward. HST tax collected minus HST (input tax credits-ITCs) paid out, for a given time period. Good records are important. Find out how often your business must report and file, and that is taken care of. There are no predictions, just pay on time to avoid penalties. HST is very important, but not complex. Corporate/business taxes are more complicated. There are three ways to predict […]

Generally, corporate income is taxed at a lower rate than personal income. For many small proprietorships it may not matter. Corporate taxes may be more complicated sometimes, but generally that is out of an effort to be equitable and cut back on loopholes. Is incorporation for you? From a tax accounting perspective there are rules to follow: First if you walk like an employee, and act like an employee, you cannot claim your income as corporate. The rules are more complex than that, but generally the more one has creative control to get the job done and responsibility to bring […]